Fitch Affirms Orenburg Region at 'BB'; Outlook Positive

Thu Oct 24, 2013 11:34am EDT

MOSCOW/MILAN/LONDON, October 24 (Fitch) Fitch Ratings has affirmed the Russian Orenburg Region's Long-term foreign and local currency ratings at 'BB' and the Short-term foreign currency rating at 'B'. The National Long-term rating has been affirmed at 'AA-(rus)'. The Outlooks on the Long-term ratings are Positive. The Orenburg Region's outstanding senior unsecured domestic bonds of RUB9bn (ISIN RU000A0JTGE4 and RU000A0JTZK1) and JSC Orenburg Housing Mortgage Corporation's (OHMC) senior unsecured bond of RUB1.37bn (ISIN RU000A0JS3Q8) guaranteed by the region have also been affirmed at 'BB' and 'AA-(rus)'. KEY RATING DRIVERS Fitch expects Orenburg region's debt to remain moderate with direct risk at RUB25bn in 2014-2015, up from about RUB17bn in 2012. In Fitch's base case scenario direct risk is not expected to exceed 35% of current revenue in the medium term. The payback ratio (direct risk/current balance) is likely to be at about three years in 2013-2015, less than the expected average maturity of the region's debt portfolio of about five years. Orenburg region's liquidity was strong in 2011-2012. Cash reserves increased to RUB2.3bn in 2012 from RUB1.2bn in 2011. Additionally the region maintains stand-by credit lines of up to RUB5bn, tendered on a rolling basis with commercial banks. Fitch expects Orenburg region to restore its operating margin to about 10% in 2013-2015, based on growing output in the core oil and gas sector. The region's operating margin fell to 5.8% in 2012 from 9.9% in 2011, due to operating expenditure increase in response to 2012 presidential initiatives aimed at salary increases for certain groups of public employees. The local economy is dominated by oil and gas companies, which provide a sustainable tax base. Concentration of the tax base exposes Orenburg region to potential changes in the fiscal regime or business cycles in the sector. A robust economy supports stronger-than-average wealth indicators - GRP per capita exceeded the Russian region median by 25% in 2012 - while average salary was just 10% below the median. Orenburg region's contingent risk is low and limited to several guarantees issued to local companies to promote economic development and to self-serviced debt of its public entities. The region guaranteed the domestic bond of OHMC of RUB1.37bn issued in 2012. None of the guarantees have been called by the lenders and the region is likely to issue several new guarantees in 2013-2015. Orenburg region funded capex of RUB11.1bn in 2012 (2011: RUB11.6bn), which represented 16.3% of total spending (2011: 18.4%). The region's self-financing capacity is strong, with the current balance and capital revenue comfortably covering 78% of capital outlays in 2012 (2011: 90%). RATING SENSITIVITIES The ratings could be positively affected by a sustainable debt coverage ratio of below four years of current balance and direct risk remaining below 40% of current revenue. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow, 115054 Secondary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside United States', dated 9 April 2013, are available on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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